Micro-Chapter 14

In a negative-sum game the overall loss is greater than the overall gain, but a zero-sum game can be seen as a ______ situation

"I win-you lose"

Price leaders make price adjustments ______.

- by communicating impending price adjustments to the industry. - by establishing a price that discourages new entrants into the industry. - infrequently, due to the uncertainty in rivals' response to these price changes.

Advertising increases efficiency by

- facilitating the introduction of new products - lowering search costs for consumers

Advertising can reduce efficiency by ______.

-providing misleading info -manipulating consumer preferences

Industry Y is dominated by five large firms that hold market shares of 21, 21, 21, 19, and 18. The Herfindahl index for this industry is

1,684

The Herfindahl index for an industry is 2,550. Which of the following sets of market shares and industry with four firms would produce such an index?

20, 25, 25, and 30

Industry Y is dominated by five large firms that hold market shares of 38, 36, 12, 4, and 10 percent. The four-firm concentration ratio for this industry is

96 percent

What is a statement of coercion that is believable by the other firm?

A credible threat

Which situation results when the profit outcomes based on the firms' pricing choices is positive?

A positive-sum game

Which type of game correlates most closely with a win-win scenario

A positive-sum game

If new firms to an industry must incur large advertising costs in order to establish their goods in a market, what might be the result?

Additional barriers to entry

Oligopolistic firms do which of the following when they change their pricing strategies?

Affect profits and influence the profits of rival firms

What is a statement of coercion that is not believable by the threatened firm?

An empty threat

What is the Nash equilibrium?

An outcome in the payoff matrix from which neither firm wants to deviate since the current strategy is optimal given the rival's strategic choice.

How can oligopolistic firms influence their profits and the profits of their rivals?

By changing pricing strategies

Dominant firms in an industry can cause the four-firm concentration ratio to be misrepresented, leading the four-firm concentration ratio to overstate the amount of concentration in the industry. How can this problem be resolved?

By using the Herfindahl index

What is it called when a group of producers creates a formal written agreement stating the level of output by each firm and the prices that must be charged?

Cartel

In which of the following industries do patents constitute a large barrier to entry?

Computer Chemical Pharmaceutical

What are the negative effects if large oligopolists do not advertise?

Consumers would be unaware of important new products. Customers might purchase less efficient products that cost more.

In a non-collusive oligopolistic industry, prices are generally stable for which of the following?

Cost reasons Demand reasons

Firm "A" has a pricing option that is better than any other alternative option regardless of the actions of its rival. What is this called?

Dominant strategy

Which of the following reflects the possible actions of firms in a repeated game?

Firm "A' will cooperate with Firm "B" in game one with the expectation that Firm "B" will then cooperate with Firm "A" in the next game.

Which scenario describes a simultaneous game?

Firms choose strategies at the same time.

Which of the following is not a characteristic of oligopoly?

Firms have no control over their price.

How does a repeated game impact firms' behaviors?

Firms may restrain from competing as hard as possible. Firms may reciprocate their rivals' actions. Firms may want to cooperate.

What happens after a couple of rounds of a repeated game?

Firms practicing reciprocity will earn more.

Collusion is more likely to occur when which of the following characteristics are true?

Firms produce homogeneous goods. Firms face similar costs.

What are oligopolists able to do by controlling price through collusion?

Increase profits Reduce uncertainty Prohibit the entry of new rivals

How can advertising increase monopoly power of a firm?

Increased brand loyalty Greater market shares Increased profits

The four-firm concentration ratio understates the competition in the aluminum industry because aluminum competes with copper in many applications. What kind of problem does this represent with the four-firm concentration ratio?

Interindustry competition

What does a demand curve look like for an oligopolistic firm?

It could be downward sloping or kinked.

What are the positive effects of large oligopolists advertising?

It enhances competition and reduces monopoly power. It lowers search costs of information for consumers.

What is the overall effect of a large firm using brand loyalty and increasing advertising to gain profit and market share?

It helps the firm acquire monopoly power.

When Chipco makes an empty threat that they will lower their price significantly if Dramco does not also follow its national pricing strategies like Chipco, how does it impact the outcome of the game based on the payoff matrix?

It will move towards Nash equilibrium, cell A.

Which of the following is true about the oligopolist if rivals match a price cut but ignore a price increase?

Its marginal revenue curve would consist of two segments

What has been the result of a recent increase in foreign competition in oligopolistic industries?

More competitive pricing

A large automaker wants to promote its large truck line, but it first tries to figure out if its competitors will do the same. What does this represent?

Mutual interdependence

Firm "A" wants to reduce the price of its good but must consider how its rivals will react. What characteristic does this reflect?

Mutual interdependence

What is the most significant example of an international cartel?

OPEC

Which of the following are the reasons why multiple models are used to study oligopolies?

Oligopolies encompass a greater range and diversity of market situations. Oligopolies cannot predict the reactions of their rivals.

What kind of game is it when firms choose their optimal pricing strategy today without worrying about possible interactions in the future?

One-time game

Which are barriers to entry in both monopolies and oligopolies?

Ownership and control of raw materials Preemptive pricing Patents Large capital investment

What are three models used to study pricing and output by oligopolies?

Price leadership model Collusive pricing model Kinked-demand curve model

Which of the following are obstacles to collusion in an oligopolistic industry?

Recession Demand and cost differences Antitrust laws Cheating

Based on the graph, which of the following is the reason for the demand curve segment e to D1?

Rivals match a price decrease

In what kind of game does one firm move first and commit to a specific strategy and then the rival responds?

Sequential game

What kind of game is it if the firms must choose their pricing strategies at the same time?

Simultaneous game

What is the term for self-interested actions that take the reactions of others into account?

Strategic behavior

Which of the following names would typically identify an oligopolistic industry?

The U.S. Big Five

If a firm assumes that its rivals will match all price changes, but the firm's rivals actually charge a lower price what are the potential consequences?

The firm is failing to produce at the profit-maximizing output. The firm's demand curve will shift further to the left. The firm's profits will be lower.

Which of the following is a model used to examine oligopolistic pricing?

The kinked-demand curve model

What is the four-firm concentration ratio?

The percentage of total industry sales accounted for by the four largest firms

Why is collusion desirable to oligopolistic firms?

The possibility of price wars diminishes and profits are maximized.

What is the example of game theory based on a scenario where two people are encouraged to confess to a crime?

The prisoner's dilemma

From society's standpoint, what are the effects of collusion in an oligopolistic industry?

The same as a monopoly

Which statement is true about oligopolies?

They do not achieve allocative efficiency because their price exceeds marginal cost.

Which statement is true about oligopolies?

They may produce homogeneous or differentiated products.

Which are reasons that that firms merge?

To increase control over the product's price To increase economies of scale To increase market share To obtain lower input prices

The price leadership model in an oligopoly can break down and when it does it can lead to ______.

a price war

Firms in oligopolistic industries are "price makers" because such firms ______.

are few in number

Short-term inefficiencies caused by oligopolists ______.

are offset by more attention being paid to product R&D

Which of the following industries is an example of price leadership by one oligopolistic member?

beer

An example of an oligopoly that produces a standardized product is the market for ________.

cement

What term means "cooperation with rivals?"

collusion

Advertising benefits society by ______.

conveying information to consumers

When advertising is self-canceling, then it ______.

decreases efficiency because demand remains unchanged but costs increase

The shape of the demand curve for an oligopolistic firm ______.

depends on the actions of rivals to price changes

No single model is used to gain insights into oligopolistic pricing and output because of ______.

diversity of market situations

A firm has a(n) ______ strategy when its pricing option is better than any alternative pricing option regardless of the pricing strategy its rival follows

dominant

One qualification to why an oligopoly may not act like a monopoly is ______.

due to foreign competition that may increase efficiency through increased rivalry

In order to achieve greater ______ and market share, firms in the same industry may consider the merger of two or more companies.

economies of scale

True or false: Under the price leadership model, the price leader frequently adjusts price in response to day to day changes in the market.

false

Oligopolies have ______.

fewer firms than monopolistic competition

A two-firm payoff matrix shows ______.

firm profit from alternative combinations of strategies.

The study of how people behave in strategic situations is called _______ theory.

game

The study of how one firm reacts to the actions taken by another firm or individual when implementing a strategy is called _____.

game theory

The difference in elasticity of demand above and below the going price creates a ______ in the marginal-revenue curve.

gap or vertical segment

What is it called when firms reach a verbal or tacit agreement with rivals about price in a social setting like the golf course?

gentlemans agreement

Compared to monopolies, oligopolies ______.

give the appearance of increased competition

Usually a larger Herfindahl index means ______ market power within the industry.

greater

Industries X and Y both have four-firm concentration ratios of 90 percent, but the Herfindahl index for X is 7,814, while that for Y is 8,206. These data suggest

greater market power in Y than in X.

For an industry to be considered an oligopoly, the four-firm concentration ratio must be ______.

greater than or equal to 40%

After several rounds of a repeated game with reciprocity, the firms' profits will be ______.

greater than the profits without reciprocity

The broken marginal-revenue curve hints that an oligopolist ______ if its costs change substantially.

has no reason to change its prices

True or false: Firms in an oligopoly always produce a homogeneous product

high

Companies often merge to ______ monopoly power.

increase

Firms often merge, forming oligopolies in order to ______.

increase control over price become a larger buyer of inputs gain greater control over market supply

A possible effect of limit pricing by oligopolies is that it may ______.

increase efficiency by setting the price closer to marginal cost and the minimum average total cost

Advertising may decrease economic efficiency if it ______.

increases monopoly power

The four-firm concentration ratio and the Herfindahl index measure ______.

industry concentration

An industry having a four-firm concentration ratio of 69 percent

is an oligopoly

An oligopolistic firm's marginal revenue curve is made up of two segments if ______.

its rivals match a price cut but ignore a price increase

An oligopoly firm's demand curve will be kinked if ______.

its rivals match price decreases but ignore price increases

In the _______ model of oligopoly, firms react to price decreases but ignore price increases by other firms.

kinked-demand

Without collusion, if a firm incorrectly assumes that its rivals will charge the same price but its rivals actually charge a lower price, the firm's demand curve will shift to the ______ .

left

In the graph, the price elasticity of demand is ______ below the price of P0.

less elastic Reason: Above P0, it is reasonable to conclude that a non-collusive oligopolist will lose many of its rivals to its competitors, making that segment of the demand curve above P0 more elastic; whereas below P0, its sales will increase very modestly since rivals will match the lower price making that segment of the demand curve less elastic or "inelastic".

As a means of conveying information, advertising is a relatively

low-cost way to get information to consumers.

When oligopolists create entry barriers through limit pricing, consumers will see ______.

lower prices similar to those that competitive, free entry would create

Compared to pure monopolies, oligopolies ______.

may be less desirable because they are not regulated by government to protect consumers

In general, industries that typically have lower Herfindahl index values are ______.

monopolistically competitive rather than oligopolistic

Compared to pure competition, oligopolistic industries may result in ______.

more technological advances because oligopolies have assurances of rewards caused by barriers to entry more technological advances because oligopoly firms earn economic profits to fund research and development

A situation in which each firm's profit depends not entirely on its own price and sales strategies but also on those of other firms is known as ______.

mutual interdependence

The situation in an oligopolistic industry in which the profits of each firm depend on the actions of rivals is called ______.

mutual interdependence

Oligopolies are not a desirable market structure because they achieve ______.

neither productive efficiency nor allocative efficiency

The world's most powerful international cartel deals primarily with ______.

oil

An industry that is described as one with the "Big Three" is usually classified as which type of industry?

oligopoly

A diagram with four cells representing the possible pricing strategies of two firms is known as a ______.

payoff matrix

As the first mover in a sequential game, the firm is able to _____ its rivals from entering the market.

preempt

A type of implicit understanding used by oligopolists to coordinate prices without engaging in outright collusion is known as ______.

price leadership

When members of an oligopoly react to price changes by a dominant firm, the _____ _____ model is most applicable.

price leadership

In 2009, Walmart cut its price on several new books and Amazon matched it. Walmart then cut its price even more and it was also matched by Amazon, so Walmart cut its price again which was then undercut by Target's even lower price. What is it called when firms behave in this way?

price war

Firms are likely to engage in collusion when they ______.

produce homogeneous products

Oligopolists often compete through product development and advertising instead of price because ______.

product development and advertising are relatively difficult to copy

Antitrust laws in the United States ______.

prohibit price fixing

Barriers to entry into an oligopoly most resemble those of a ______.

pure monopoly

Firms are more likely to cheat on a collusive agreement when the economy is experiencing a

recession

When a game between rivals occurs more than once, it is called a ______ game.

repeatable

A game that is played more than once between rivals is a _____ game

repeated

he four-firm concentration ratio is based on the ___.

sales of the largest firms in an industry

In a(n) _____ game one firm moves first, committing to a strategy and then the rival firm responds.

sequential

The oligopolistic firm's marginal revenue curve exhibits a gap or vertical segment because of the ______.

sharp difference in elasticity of demand above and below the going price

The Herfindahl index corrects for dominant firms in the industry by _______ the market shares of the firms and therefore giving greater weight to those more powerful firms in the industry.

squaring

Suppose the rivals of an oligopolistic firm ignore both a price increase and decrease. If so, then the firm's demand curve will be ______.

straight

Suppose the rivals of an oligopolistic firm match either a price increase or decrease. If this occurs, then the firm's demand curve will look ______.

straight and steep

One of the largest barriers to entry into the oil refining industry is ______.

the capital equipment investment

Advertising acts as a barrier to the entry of new firms into oligopolistic industries because ______.

the costs of advertising are large in this situation

You are told that the four-firm concentration ratio in an industry is 20. Based on this information you can conclude that

the four largest firms account for 20 percent of industry sales.

If the four-firm concentration ratio for industry X is 52,

the four largest firms account for 52 percent of total sales.

Industry concentration measures the extent to which ______.

the largest firms account for industry output

Over a long time period, cheating ______ collusive oligopolies

threatens

To reduce uncertainty or increase profits, oligopolists may change their prices ______.

through collusion

Oligopolistic behavior implies that oligopolists prefer competition ______

through product development through advertising

True or false: A cartel abides by a formally written agreement that specifies the output and price of each member firm and is a form of overt collusion.

true

True or false: A one-time game occurs when firms will choose their pricing strategy for today without concern about future interactions with their rivals.

true

True or false: Strategic behavior takes into account the reactions of others.

true

Which of the following represent shortcomings of the four-firm concentration ratio?

world trade dominant firms interindustry competition localized markets

When one firm's gain must equal the other firm's loss it is called a ______ game whereas in a ______ game the net gain is negative.

zero-sum; negative-sum

What is the only stable outcome in a payoff matrix?

Nash equilibrium

Select all of the industries that are known to practice price leadership.

Steel Cement Copper

Oligopolies are comprised of ______.

a few large producers

A firm in an oligopolistic market ______.

can set its price and output to maximize profits

Select all of the following which are examples of oligopoly categories that produce a standardized product.

copper

By controlling ______ through collusion, oligopolists may be able to reduce ______, ______ profits and block the entry of new rivals.

prices; uncertainty; increase

During macroeconomic instability, the lack of determination of price and price rigidity is best described by ______.

the shortcomings of the kinked-demand curve of oligopolistic firms

Firms have a desire to cheat on a collusive agreement because ______.

their profits and sales will rise